20180221-法国巴黎银行-MICHAEL_SNEYD__GLOBAL_HEAD_OF_FX_STRATEGY_AND_CROSS_ASSET_STRATEGIST_BNP_PARIBAS_LONDON_BRANCH_29页_2mb

BNP PARIBAS MARKETS CALL - 21 FEBRUARY 2018

Core Content

This document provides a weekly cross-asset market view from BNP Paribas, focusing on the UK and Brexit implications. It outlines the firm's current market outlook across various asset classes and highlights key concerns and opportunities for investors.

Main Points

• Inflation and Yields: Inflation expectations are rising, pushing 10-year US breakevens higher and expected to reach 2.4%, with US 10-year yields likely to exceed 3%. UK inflation is supported by the weak GBP, but this effect is expected to fade in 2018. Higher oil prices will continue to support headline inflation.

• Brexit Concerns: Brexit remains a major concern for UK citizens, with a shift in priorities from immigration control to access to the single market. The UK's future relationship with the EU is still under negotiation, and access to the single market and control over immigration are key issues.

• Economic Outlook: UK productivity growth is declining, contributing to a contraction in household consumption and real wage decline compared to the US and eurozone. The UK economy is underperforming relative to other major economies, with weak consumption and investment growth offsetting strong export growth.

• Equity Market View: The UK domestic equities are expected to be more vulnerable to a slowdown in domestic growth. The BNPP UK Domestic Basket, which consists of 15 stocks with high domestic revenue exposure and low profit margins, is likely to underperform the FTSE100 in a UK economic slowdown.

• FX Market Outlook: GBP is currently undervalued relative to its long-term fair value, but is expected to weaken due to soft economic data and rising political uncertainty. EURGBP is forecast to rise to 0.92, with a long EURGBP position recommended.

• Credit Market Analysis: UK investment grade credit spreads are at very tight levels, while high yield companies may face credit pressure. The UK IG credit market is expected to remain optimistic, but there are concerns about the impact of a hard Brexit on the market.

• Gilt Market Dynamics: The UK government bond market is expected to see increased supply over the coming years, regardless of Brexit outcome. Inflation-linked bond issuance is likely to decrease, which may lead to a steepening of the 10s30s breakeven curve.

• Demand for Gilts: Domestic investors, particularly pension funds, are strong buyers of gilts, with a preference for 30-year inflation-linked bonds and ultra-long conventional gilts. Insurance companies have been net sellers, but this trend has recently reversed.

• Market Positioning: Markets have stabilized despite rising term yields, but volatility is expected to remain elevated. Large short gamma and long carry positions pose risks, and VaR has increased, leading to a dampening of market exuberance.

Key Information

• Market Outlook:

  • UK domestic equities are expected to underperform due to weak domestic growth and high domestic revenue exposure.
  • The BNPP UK Domestic Basket is expected to underperform the FTSE250 and FTSE100 in a slowdown scenario.
  • GBP is undervalued but is expected to weaken, with EURGBP as a recommended trade.
  • UK IG credit is at tight levels, while UK high yield companies may face pressure.

• Brexit Impact:

  • The UK's future relationship with the EU is still uncertain, with a focus on single market access and control over immigration.
  • A hard Brexit could lead to a recession, resulting in increased borrowing needs and a potential underperformance of gilts.

• Gilt Market:

  • UK gilt issuance is expected to increase, with a shift towards conventional bonds.
  • Inflation-linked bond issuance is likely to decline, which may lead to a steepening of the 10s30s breakeven curve.
  • The UK's gilt market is influenced by domestic investor demand and the potential for a no-deal Brexit scenario.

• Economic Indicators:

  • UK GDP growth has softened, diverging from US and eurozone growth.
  • UK manufacturing and services PMIs have declined but remain elevated.
  • The BoE is expected to tighten policy, with 30bp of rate hikes priced for 2018.

• Investor Sentiment:

  • UK citizens prioritize single market access over immigration control.
  • UK pension funds have increased their allocation to fixed income and reduced equities.
  • Insurance companies have historically been net sellers of gilts but this trend has recently reversed.

Summary Table

Additional Information

• The document includes detailed charts and data sources, such as Bloomberg, BNP Paribas, Macrobond, and OBR.
• It provides dial-in details for the Markets Call, with a password of "The BNP Paribas Markets Call".
• The UK's output gap closed earlier than other major economies, driven by low productivity growth and weak domestic demand.
• The UK's economic performance is expected to be impacted by Brexit, with potential for a recession and increased borrowing needs.